BRICS band together to build derivatives block

Members of the BRICS emerging markets block have set out plans for an alliance that would allow market participants in Brazil, Russia, Hong Kong and South Africa to trade equity index derivatives on each other’s markets more easily.

Members of the BRICS emerging markets block have set out plans for an alliance that would allow market participants in Brazil, Russia, Hong Kong and South Africa to trade equity index derivatives on each other’s markets more easily.

The initiative brings together Brazil’s BM&F Bovespa, Russia’s MICEX, Hong Kong Exchanges and Clearing (HKEx) and South Africa’s Johannesburg Stock Exchange (JSE). The National Stock Exchange of India and the Bombay Stock Exchange (BSE) have signed letters of support and are expected to join the alliance after finalising outstanding requirements.

The first stage of the project will see the exchanges begin cross-listing of financial derivatives on their benchmark equity indices by June 2012.

“The alliance enables more investors to gain exposure to the emerging economies of the BRICS group, whose economic power is on the rise,” said Ronald Arculli, chairman of HKEx and of the World Federation of Exchanges. “Investors will gain easier access to major equity index derivatives of the BRICS markets which will now be offered in local currency on the alliance exchanges.”

The second stage of the project centres on plans to jointly develop new products for cross-listing on their exchanges. According to Russell Loubser, CEO of the JSE, equity indices could be used as underlying assets to create new products, as well as a means of measuring market performance.

The third stage is intended to include further cooperation in joint products design and new services development. Ruben Aganbegyan, president of MICEX, suggested the creation of joint products combining various underliers would facilitate liquidity growth in the BRICS markets and improve the understanding of other developing markets by local investors.

“The BRICS exchanges alliance has a great potential as it will create avenues for Indian investors to diversify their portfolios and expand into other emerging markets,” said Madhu Kannan, CEO of India’s BSE. “It will also provide unique opportunities to investors in other BRICS nations to participate and contribute in India’s growth. The BSE will actively work towards bringing world-class products to India as well as developing new products for other BRICS markets.”

The six exchanges involved in the project represent a combined market capitalisation of US$9.02 trillion, according to WFE figures, with some 9,500 listed companies. The Futures Industry Association has estimated that the six exchanges accounted for 18% of the global turnover in financial derivatives in the first half of 2011.

First identified by Goldman Sachs economist Jim O’Neill in 2001, the BRIC countries first began political dialogue as a distinct group in September 2006; a full-scale meeting followed in May 2008. South Africa officially joined the original four BRIC countries in December 2010, adding an ‘S’ to the group’s acronym. The BRICS most recently held a summit in Sanya, China in April 2011.